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‘Fire and Fury’ Reignite Lazy Summer Markets

August is traditionally a period of low volatility; the finance heavyweights are on holiday, and the markets are happy idling until they return. Until, that is, something happens to rattle the cages of the currency markets. This week, the catalyst for volatility arrived in the form of renewed hostilities between the US and North Korea, writes FXTM’s VP of Corporate Development and Market Research, Jameel Ahmad.

Monday saw China’s foreign minister warn his North Korean counterpart that the situation on the Korean Peninsula was likely to reach ‘crisis point’ after the UN voted unanimously for tougher sanctions on Pyongyang. North Korea responded with a threat in the form of re-examining plans to strike the US Incorporated Territory of Guam. President Trump’s response was characteristically inflammatory, and the US Commander in Chief, vowed to meet North Korean hostilities with ‘fire and fury’, sparking fears of armed conflict between the two.

Trump effectively threw a grenade at the sleepy summer markets, sparking a global sell-off that saw stocks tumble and precious metals surge, as investors headed for safe havens. The sell-off intensified in Europe as trading progressed, with the FTSE 100 down by 0.8%, and German DAX taking a 1.5% tumble by lunchtime on Wednesday. Is this a reaction to the threat of conflict, or would recent highs have caused a sell-off anyway? Analysts are divided on this point, but it is worth noting that a major winner on the London Stock Exchange yesterday, was weapons manufacturerBAE Systems (BAESY), with shares up by 0.8% near the end of the day.

Across the pond, New York opened on Wednesday to a 0.3% Dow drop. It may look like a smaller slip compared to European counterparts, but much of the US losses had already been priced in, with the Dow Jones down 0.15% on Tuesday night following the president’s warning. Tuesday evening also saw declines for both the S&P 400 (-0.24%) and Nasdaq (-0.21%).

With the prevailing risk-on sentiment switched, investors flocked to safe havens. Gold, CHF and JPY all rallied on Wednesday as a result. The Japanese yen strengthened against the greenback, achieving an eight-week high as trading in London drew to a close yesterday. The US dollar strengthened against the Euro, but lost against GBP and JPY. However, it was the Swiss franc that caught the markets by surprise, charting the biggest rise against the Euro since 2015.

Wednesday was a good day for precious metals as well, with spot gold rising nearly 1% to reach a two-month high of US$1,272.64 per ounce. Platinum and silver were both on the rise too, increasing 0.53% and 2.79% respectively.

The mounting conflict between the US and North Korea is a unique one. We haven’t dealt with a real possibility of nuclear war since the Cuban Missile Crisis, so no one really knows what sort of reaction it would elicit from the market. Given Japan’s proximity to North Korea, a big question mark hangs over the JPY and whether it will continue to perform well if tensions continue to build over the coming days.

US Secretary of State, Rex Tillerson, was quick to allay fears on Wednesday morning, downplaying the North Korean risk. Trump’s latest war of words may have been enough to jolt the markets from their summer slumber but, had traders taken the threat of conflict seriously, stocks would be posting far more dramatic losses. As it stands, the markets have merely been stirred enough to make investors more risk averse as the world hopes that this week’s geopolitical tensions end up being short-lived and calmer minds ultimately prevail.

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